Hotel California Student Coaching Slides

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Hotel CaliforniaStudent Coaching Slides
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Gross Margin

• Gross Margin or Gross Profit is sales revenue
  minus cost of goods sold.
• This definition is for a retailer or
  manufacturer, not a service company.
• Footnote 2 tells what is included in cost of
  revenues, which is subtracted from the revenues
  to yield gross margin.
• Footnotes to the financial statements provide
  readers information that help them better
  understand the accounting rules, assumptions and
  items in the statements.

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Cash Flow

• Income statements are prepared on the accrual
  basis to measure earning activity, not cash flow.
  
• Differences in accrual income and cash occur
• From matching expenses against revenues
  regardless of the timing of cash payments, such
  as depreciation, bad debts, estimated warranties,
  etc.
• From following revenue and expense recognition
  rules rather than computing the actual payments
  to suppliers and receipts from customers.
• From cash payments/receipts for items that only
  impact the balance sheet, e.g., dividends,
  capital contributions loans, or equipment
  purchases.

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Cash Flow-Continued

• In this case, you are provided information about
  non-cash expenses on the income statement.
• In addition, this is an income statement for a
  sole-proprietorship (SP.) In this company, the
  owner provided work that others would have been
  paid to perform. She took that money in the form
  of a drawing account, not a salary.

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Draw vs. Expense

• Corporations record all obligations for services
  received as expenses.
• Expenses are deducted from revenues to yield
  income.
• Drawing accounts in SPs are treated as
  distributions of profits to owners. These are
  not treated as expenses of operating.
• Critical Thinking If you are valuing a
  sole-proprietorship and owners have rendered
  services and have only received drawings in
  return, what should you do, if anything?

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Present Value

• Present value is a technique that considers the
  time value of money.
• PV allows cash amounts expected to be paid or
  received at different times to be brought to
  present day values so they can be combined.
• If amounts differ over time calculate the present
  value of a single sum, if amounts are equal each
  period, calculate the present value of an
  annuity.
• Critical Thinking
• What would go into the decision to use an 8
  discount rate?
• Why is present value calculated on cash flow and
  not on income?
• Assume that you can receive 500,000, 515,000,
  and 600,000 over a 3 year period and the
  present value of those sums at 8 is 1,495,370.
  Explain what that means in simple terms.

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Expected Value

• Expected Value is a method of calculating an
  average that places weights on the items being
  averaged. The weights represent the probability
  of each item occurring.
• Experts believe that in valuations of this type a
  40 weight should be given to the gross profit
  value and a 60 weight should be placed on the
  present value of cash flows.

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Credibility of Financial Statements

• To be credible, the financial statements must be
  prepared in accordance with generally accepted
  accounting principles (GAAP.)
• To assure yourself that this has occurred, you
  need a signed opinion letter attached to the
  financial statements.
• Three forms of letters might be attached
• Compilation letter
• Review letter
• Audit opinion
• These involve differing degrees of work, but are
  signed by CPAs. CPAs are tested on their
  knowledge and their practice is regulated.

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NEGLIGENCE

• Duty of Care Owed by Defendant to Plaintiff
• Breach of the Duty of Care by the Defendant
• Causation
• Damages

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DUTY OF CARE

• Foreseeable Plaintiff within the Zone of Danger
• Duty Arising out of Contract
• Assumption of Duty

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BREACH OF DUTY OF CARE

• Standard of Care
• a defendant owes the plaintiff a duty to act as
  would an ordinary prudent person under the same
  or similar circumstances

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CAUSATION

• Causal Connection there must be a causal
  connection between the negligent conduct and the
  resulting injury.
• But For Test But for the defendants negligence,
  the plaintiff would not have sustained the loss.

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Contract Formation

• Offer Acceptance are Required
• The Terms of Acceptance Must Mirror the Terms of
  the Offer

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Writing Requirement

• Contracts for the Sale of Real Property
• Under the Statute of Frauds, Contacts for the
  Sale of Real Property Must be in Writing and
  Authenticated by the Person against Whom
  Enforcement is Sought